Does COVID-19-specific news affect stock market liquidity? Evidence from Japan

This article examines the effect of COVID-19-specific news on stock market liquidity in the Japanese Topix 500-listed firms. Our empirical analyses show that both COVID-19 confirmed cases and COVID-19-specific news induce a negative effect on stock market liquidity. These findings suggest that the effect of COVID-19-specific news on U.S. stock market liquidity [1] is robustly confirmed in Japanese firms. This study also presents recommendations derived from Narayan et al. [2], who constructed a COVID-19-specific news index using data from popular newspapers worldwide. In sum, this study presents the following:• Stock market liquidity is negatively affected by confirmed cases of COVID-19 in Japan.• The impact of COVID-19-specific news on stock market liquidity was analyzed using the OLS regression method.


Introduction
This study aims to clarify how the COVID-19 pandemic affected stock market liquidity in Japanese financial markets.In financial markets, liquidity is an important factor during a pandemic, such as the COVID-19 pandemic [4] .In the U.S., liquidity equity markets deteriorated during the COVID-19 pandemic [1] .The negative investor sentiment induced by COVID-19-specific news affected stock market returns [2] .In fact, the confirmed cases of/deaths from COVID-19 reduced the stock returns [5] .With regard to stock market liquidity, previous studies found two channels through which it was affected.First, the confirmed cases or deaths negatively affected investor sentiment, which caused a decrease in stock market liquidity [ 1 , 6 , 7 ].Second, the general sentiment related to COVID-19specific news also negatively affected the stock market liquidity [1] .In this study, we aim to confirm the robustness of the effect of COVID-19-specific news [2] on stock market liquidity using the Japanese financial market setting.
Our research intends to fill the research gap of how COVID-19-related news affected stock market liquidity.During the first wave of COVID-19, stock market liquidity decreased with the increase of COVID-19 cases and negative sentiments in the U.S. equity markets [1] .In Japan, the negative news increased negative investor sentiment toward shipping firms [8] and restaurant firms [9] .Thus, the negative investor sentiment induced by COVID-19-specific news [2] also affected stock liquidity in Japan.However, research gaps regarding how COVID-19-related news affected stock market liquidity in Japan may remain.
We reveal how stock market liquidity was affected by the investor sentiment that arose following COVID-19-specific news.The WHO's declaration of the COVID-19 epidemic in China affected the Japanese stock market returns at an earlier stage of the pandemic [ 10 , 11 ].Therefore, we conjecture that stock market liquidity was also affected by COVID-19-specific news.We used the OLS estimation method to gain the best linear unbiased estimator [12] .
Our empirical results are summarized in the following three points.First, we determined that the increase in confirmed cases negatively affected the sentiment of market investors, resulting in decreased market liquidity.Second, COVID-19-related news also negatively affected the sentiment of market investors, and reduced market liquidity.Our study confirmed the robustness of previous studies that show that stock market liquidity was affected by COVID-19-specific news [ 1 , 7 ].We also consider the possibility of nonlinear estimators and estimate the non-linear regression, including that of the quadratic terms of COVID-19-specific news.Using non-linear regression, we also confirmed the robustness of our results.

Data
Our sample consists of TOPIX 500-listed firms in Japan. 1 Our sample period was January 23, 2020-April 28, 2021. 2 The financial and stock return data of our sample firms were retrieved from their net profit margin (NPM) and the Astra Manager database.Data on the number of COVID-19 cases and deaths were retrieved from the Oxford Coronavirus Government Response Tracker (OXCGRT) 3 .We also obtained data from COVID-19-specific news indices [2] , which included: the Aggregate COVID-19 index (A_Covid), Medical Index (Medical), Travel Index (Travel), Uncertainty Index (Uncertainty), Vaccine Index (Vaccine), and COVID Index (Covid).
Fig. 1 provides the time plot of Covid-19-related cases and deaths.During our sample period, new cases and deaths showed the highest value in October 2020 and increased again from March to April 2021.

Methodology
We analyzed how stock market liquidity was affected by the investor sentiment that arose in response to COVID-19-specific news, following Baig et al. [1] and Haroon and Raviv [7] .We estimated the OLS regression Eq. ( 1) with robust standard errors clustering at firm levels [1] 4 .To control for the industry-specific effects, we included industry-fixed effects based on the Tokyo Stock Exchange's 33 industry sectors.To consider the robustness of the result, we also estimated non-linear regression as in Eq. (2) . ( Amihud ′ s Iiquidt y i , t ) = ln To estimate Eq. ( 1) , we investigated whether stock market liquidity was negatively affected by the COVID-19 pandemic-related indices in Japan.The dependent variable was the natural log of Amihud's [3] daily illiquidity measure (ln_illiq) as in Eq. ( 3) [ 1 , 7 , 15 ].Illiquidity was intuitively interpreted as the daily price response related to one unit of trading volume and was also considered as a rough proxy of price impact [3] .To confirm the robustness, we also adopted the daily turnover price impact (ln_price impact) as an alternative illiquidity measure in Eq. ( 4) [16] .We adopted logs of the number of confirmed cases (ln_Case) and number of deaths (ln_Death) as measures of the pandemic, following previous studies [ 1 , 7 , 17 ].In addition, we adopted the six indices proposed by Narayan et al. [2] as measures of the pandemic and used their natural logs as well [2] .We also controlled for the log of closing price of a stock (PRICE) and log of traded share volume (VOLUME).Volatility (VOLATILITY) was measured as the natural log of maximum price minus the natural log of minimum price [18] .Finally, we controlled for the daily return [1] using the daily return at the 1st section of the Tokyo Stock Exchange (TSE).

Descriptive statistics
We present the descriptive statistics in Table 1 .The mean value of illiquidity (ln_illiq) is 0.65.The means of ln_Case and ln_Death are 5.98 and 2.4, respectively.The mean of the aggregate index of COVID-19 (Ln_A_Covid) is 3.95.The means of COVID-19 specific news indices such as ln_Medical, ln_Travel, ln_Uncertainty, ln_Vaccine, and ln_Covid are 3.89, 3.23, 4.03, 3.37, and 3.84, respectively.With regard to the control variables, the mean closing price (PRICE) is approximately 4000 JPY, while the mean market capitalization (SIZE) is over 1100 billion JPY.The mean daily share volume (VOLUME) is approximately 2 million shares, and the mean volatility (VOLATILITY) is 0.026.Finally, the mean of the daily return at the 1st Section of the Tokyo Stock Exchange (TSE) is 0.048.

Estimated results
We analyzed how the pandemic-related indices affected stock market liquidity.Table 2 depicts the results of the estimated OLS regression Eq. ( 1) in which illiquidity (Ln_illiq) is the dependent variable.First, we found that Ln_Case is significantly positively
(    2 .As for the vaccine-related news, we cannot gain the significant results. We further analyzed the non-linear regression, as in Eq. ( 2) .Using the estimated results of Table 4 , we confirmed results similar to those presented in Table 2 .We also achieved significant and positive results for vaccine-related news, but negatively significant results related to the quadratic terms of vaccine-related news.

Conclusion
We investigated the relationship between stock market liquidity and the COVID-19 pandemic indices.First, we found that the number of confirmed cases decreased stock market liquidity.Second, COVID-19-related news lowered market liquidity by hampering the sentiment of market investors.Finally, vaccine-related news positively affected the market sentiment, and enhanced market liquidity; however, this result was not robustly confirmed.
Our study contributes to investors and policymakers under the threat of a pandemic, such as COVID-19.We found that public fear and an increase of COVID-19 cases deteriorated market liquidity.Thus, governmental restrictions would contribute to market liquidity.
These findings suggest two lessons to learn to ensure sufficient liquidity in the stock market.First, mitigation of the number of confirmed COVID-19 cases was important for the government to maintain a well-functioning market.Second, we found that the effect of COVID-related news affected market sentiment, which correlated to market liquidity.Overall, our results confirm the robustness of the effects of COVID-19-related investor sentiment on liquidity [ 1 , 7 ] in the Japanese stock market.

Fig. 1 .
Fig. 1.Number of daily cases and in Japan.

Table 2
Main empirical results.

Table 3
Robustness of results.
(1)his table provides the results from the estimation of OLS regression model(1).All specifications include industry-fixed effects based on Industry classifications of Tokyo Stock exchange.Robust standard errors are clustered at the firm level.T-statistics in parentheses.** p < 0.01.* p < 0.05, + p < 0.1.

Table 4 (
continued ) [5].985) ( − 1.989) ( − 1.981) ( − 1.979) ( − 1.979) ( − 1.250) ( − 1.252) ( − 1.250) ( − 1.246) ( − 1.237) ( − 1.241)This table provides the results from the estimation of OLS regression model(1).All specifications include industry-fixed effects based on Industry classifications of the Tokyo Stock exchange.Robust standard errors are clustered at the firm level.T-statistics in parentheses.toLn_illiq.This result implies that an increase in confirmed cases of COVID-19 reduced liquidity in the Japanese stock market, consistent with Al-Awadhi et al.[5].By contrast, we did not achieve significant results for Ln_Deaths.Second, we found that Ln_A_COVID is significantly positively correlated to Ln_illiq, suggesting that COVID-19 specific news negatively affected stock market liquidity.Each of the COVID-19 indices (i.e., Ln_Medical, Ln_Travel, Ln_Uncertainty, and Ln_Covid) also demonstrated a significant and positive correlation with stock market liquidity.Finally, Ln_Vaccine is significantly negatively correlated to Ln_illiq.The robustness of results is confirmed by Table3which adopts liquidity (Ln_price impact) as the dependent variable.Using the estimate results of Table3, we can gain almost similar results in Table a * * p < 0.01,.*p < 0.05, + p < 0.1.correlated